THE EFFECT OF HETEROGENEITY ON FINANCIAL CONTAGION DUE TO OVERLAPPING PORTFOLIOS

Opeoluwa Banwo (), Fabio Caccioli, Paul Harrald and Francesca Medda ()
Additional contact information
Opeoluwa Banwo: QASER Laboratory, University College London, Gower Street, London WC1E 6BT, UK
Fabio Caccioli: Department of Computer Science, University College London, Gower Street, London WC1E 6BT, UK3Systemic Risk Centre, London School of Economics and Political Sciences, London, UK
Francesca Medda: QASER Laboratory, University College London, Gower Street, London WC1E 6BT, UK

Advances in Complex Systems (ACS), 2016, vol. 19, issue 08, 1-20

Abstract: We consider a model of financial contagion in a bipartite network of assets and banks recently introduced in the literature, and we study the effect of power law distributions of degree and balance-sheet size on the stability of the system. Relative to the benchmark case of banks with homogeneous degrees and balance-sheet sizes, we find that if banks have a power law degree distribution the system becomes less robust with respect to the initial failure of a random bank, and that targeted shocks to the most specialized banks (i.e., banks with low degrees) or biggest banks increases the probability of observing a cascade of defaults. In contrast, we find that a power law degree distribution for assets increases stability with respect to random shocks, but not with respect to targeted shocks. We also study how allocations of capital buffers between banks affects the system’s stability, and we find that assigning capital to banks in relation to their level of diversification reduces the probability of observing cascades of defaults relative to size-based allocations. Finally, we propose a non-capital-based policy that improves the resilience of the system by introducing disassortative mixing between banks and assets.

Keywords: Contagion; systemic risk; network models (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S0219525916500168
Access to full text is restricted to subscribers

Related works:
Working Paper: The effect of heterogeneity on financial contagion due to overlapping portfolios (2017)
Working Paper: The effect of heterogeneity on financial contagion due to overlapping portfolios (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:acsxxx:v:19:y:2016:i:08:n:s0219525916500168

Ordering information: This journal article can be ordered from

DOI: 10.1142/S0219525916500168

Access Statistics for this article

Advances in Complex Systems (ACS) is currently edited by Frank Schweitzer

More articles in Advances in Complex Systems (ACS) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().